Market Review – Week Ending 19th January

The major equity market indexes finished with modest gains for the holiday-shortened week. Stocks registered sharp gains on Tuesday, which saw the S&P 500 Index record its best one-day advance since November. Consumer staples stocks led gains within the S&P 500, while energy, industrials and business services, and real estate shares lagged.

S&P 500 Climbs Again

The S&P 500 rose 25 points last week (5% for the year so far) amid the second week of fourth-quarter earnings reports which drove much of the market’s movements. Goldman Sachs fell on Wednesday after reporting mixed results, while rival Morgan Stanley rose on Thursday after beating estimates. IBM fell sharply in early trading Friday, after providing guidance that disappointed many analysts. A one-time charge related to the recent tax reform bill led to a sharp decline in earnings for Citigroup, reported Wednesday. This and other earnings declines in the financials sector led data and analytics firm FactSet to drastically reduce its estimate of overall earnings growth for the S&P 500 Index, to a decline of 0.2% versus an advance of 10% estimated the week before.

Treasury Yields Rise as US Government Shutdown Looms

The policy environment also returned to the forefront and appeared to limit the market’s gains. With federal spending authorizations set to expire on Friday evening, congressional officials scrambled to pass a bill to keep the government funded. The prospects for passage of a compromise measure that would attract enough Democratic votes in the Senate fluctuated but seemed to grow dimmer as the week progressed. The House passed a bill along party lines on Thursday, but the trading week ended without any action in the Senate.

The prospect of a government shutdown beginning Saturday morning diminished the appeal of U.S. assets, pushing the U.S. dollar lower and Treasury yields higher. (Bonds prices and yields move in opposite directions.) Municipal bonds outperformed Treasuries, helped by restrained supply due to light issuance during the shortened holiday week.

European Indices Rise Together

European equities ended the week higher, boosted by rising technology and industrial stocks, a lift in corporate sentiment, and upbeat economic growth data from China. The European STOXX 600 index was marginally higher, recording a 0.5% gain. Germany’s blue chip DAX 30 advanced just over 1%. The French CAC 40 and Spain’s IBEX 35 also gained for the week. The UK’s FTSE 100 managed to stay in positive territory despite some downbeat economic news.

A strong euro tempered some of the equity gains. Eurozone central bankers were raising alarms about the euro’s strength, calling it “a source of uncertainty” and unhelpful. Despite a trend of broadening eurozone economic recovery, December’s consumer price index (CPI) showed that inflation was slowing somewhat. Eurozone CPI came in at 1.4%, with core CPI stubbornly staying at 0.9%. UK inflation dropped back to 3%, and the core inflation was a slightly softer-than-expected 2.5%.